How "shell" companies launder dirty money

By Ed Leefeldt

September 8, 2016 / 5:30 AM
/ MoneyWatch

Cocaine is big business in
Europe these days, according to experts with the U.S. Drug Enforcement
Administration (DEA). Boatloads of blow float across the Atlantic Ocean from
South America, only to float back as illicit money, which finds
its way to states such as Delaware.

But whose pockets does the cash end up in? That’s
an investigative dead-end.

“When I worked at the U.S.
Treasury’s FinCEN (which combats money laundering), we used to get requests from
many countries regarding drug cases where the trail went to Delaware,” said
former Special Agent John Cassara. “It was impossible to follow the paper
trails in those cases.”

Why is that? “Delaware and
other havens in the U.S. do not have beneficial ownership
information,” he said.

Panama Papers scandal could have worldwide implications

“Beneficial ownership”
sounds complicated but is actually very simple: It tells you who is the real owner. When you
buy a house, your name is on the deed. Buy Apple stock, and you own a small
piece of this multinational technology company.

But an anonymous shell
corporation allows its owners to trick the system. By definition, a shell
corporation is really a ghost. It doesn’t have any significant assets
or operations of its own. It doesn’t make anything or collect money for having made it.

It’s generally used as a “pass through” to allow another company or business to
smoothly move financial assets from one place to another, such as from a
foreign country to the U.S. Or it may simply serve as a “sleeper cell,” sitting
dormant until its owners need it.

None of this is illegal, and
many U.S. major companies have set up and use shell corporations.

But shells do lend
themselves to illegal activity, because drug lords and terrorists know they can
freely move money back and forth, often between two, three or more shells to
create a financial hall of mirrors before the funds reach their destination.

What makes them a challenge
for law enforcement -- like the DEA and U.S. Treasury Department, is that so many states allow
the real owners to remain anonymous. In states like Delaware, Nevada and
Wyoming, “you need less information to start a shell corporation than you do to
get a library card,” claimed Nathan Proctor, a director of Fair Share, a
Washington, D.C.-based consumer group.

Are U.S. lawyers helping launder money?

This makes shells the ideal
way to not only hide money but to “wash” it -- turn it from illegal bribes or
drug payoffs into legitimate business enterprises like New York City apartment
houses. The topic was spotlighted by a recent CBS “60 Minutes” expose in which
a representative of a fake African official was able to get more than a dozen
law firms to give him advice on how to set up a shell corporation.

Crime novels about the
Cayman Islands don’t compare to the U.S., which is actually one of the easiest places
to hide money, put it back in the system and coincidentally, avoid paying taxes,
according to investigators.

How much money? The Office of National Drug Control Policy pegs it at $65 billion. Since all federal agencies seize only
$1 billion, busting street-level dealers is
an ineffective “game of whack-a-mole,” said Proctor. So much slush money is
flowing through the pipes that if one pusher is taken out, another is financed.

A report by Fair Share,
called “Anonymity Overdose,” describes how the system worked for the few drug lords
whose deals have been uncovered. Mexico’s
Los Zetas cartel used its anonymous shell company to buy racehorses, one of
which it named “Number One Cartel.” Busted for using call girls to transport
oxycodone, Kingsley Iyare Osemwengie named his shell company “High Profit
Investments LLC.”

Will El Chapo come to America?

The U.S. Treasury is on to
this anonymous shell scheme. Secretary Jacob Lew is not only tightening his
agency’s regulations, but in a May 5 letter to House Speaker Paul Ryan he urged
Congress to pass a “common-sense requirement” to make sure banks and other
financial institutions know the actual “beneficial owner” of these shell
companies before the institutions do business with them.

The Clearing House
Association, a payments and advocacy organization owned by some of the world’s
largest banks, backs the proposed measure.

But disclosure of these
anonymous shells has some powerful opponents. States like Delaware get huge
revenues from setting up corporations -- especially shell corporations -- at
minimal cost to the state, according to The New York Times.

In a 2012 expose, The Times
said Delaware, operating from a small office building, had collected $860
million in taxes and fees from its absentee corporate residents during the previous
year. “Delaware had more corporate entities, public and private, than people,”
the paper noted.

States such as Nevada and
Wyoming are also moving into this arena. Ironically, these same states spend hundreds
of millions to catch and imprison drug felons and even more to rehabilitate victims
of opioid overdoses, which now kill more people than car crashes.

But the main opponent of
naming the real owners of every corporation is the American Bar Association
(ABA). In a May 24 letter to two congressmen, ABA President Paula Brown said
the legislation would subject lawyers to the Bank Secrecy Act and undermine “attorney-client
privilege,” or the confidential relationship that lawyers have with their
clients. The ABA also said such a law would interfere with state court regulation of the legal profession.

The ABA and Brown felt that the
definition of a “beneficial owner” was overly broad and would also impose burdensome
regulations on states by requiring them to obtain information on each company,
keep it current and make it available to law enforcement. (The Senate version of the
bill does provide some funding to do this.)

Patrick Fallon Jr., head of
the FBI’s financial crimes section, disagreed. “I can’t think of a reason not
to do that,” he told the McClatchy newspaper syndicate, saying it was the “most
simplistic way” to resolve the problem.

But would it? Drug cartels
are loaded with lawyers, accountants and the money to bribe public officials,
and they’re resourceful chameleons, said DEA spokesperson Russ Baer.

“We do go after the head of
the snake, and we’ve been very successful in stopping money laundering
operations by terrorist groups like Hezbollah,” he said.

But anonymous shells are
only one piece of the puzzle. In a typical transaction, drugs may move from
Colombia to Africa and then to France, handled each step of the way by a
“transfer of value” between Lebanese money brokers who are entrenched in
legitimate businesses.

The money earned is laundered back into
U.S. dollars through a scheme such as selling a boatload of used cars worth $1
million, but paid for with drug profits of $5 million.

The extra dollars are then
marketed on the “black market peso exchange,​” which puts the money back in the
pockets of the Colombian drug kingpins.

“It’s an intensive paper
shuffle,” Baer admitted. “But knowing the owners of these anonymous
corporations would help to disrupt this chain.”

Ed Leefeldt is an award-winning investigative and business journalist who has worked for Reuters, Bloomberg and Dow Jones, and contributed to the Wall Street Journal and the New York Times. He is also the author of The Woman Who Rode the Wind, a novel about early flight.